Bitcoin News, Analysis, Interviews and Features

How BitSquare aims to launch new peer-to-peer bitcoin exchange

Thursday 04 September 2014

Since MtGox, people within the bitcoin community have concerned themselves with the idea of decentralized exchanges. After all, a decentralized exchange would not be reliant on a sole group of fallible human beings and would not provide hackers with an obvious target.

There are several issues, however, that pertain to decentralized structures, especially when money is involved. Bitsquare is a decentralized, peer-to-peer bitcoin exchange that aims to be reliable, easy-to-use, and prepared to handle common issues associated with decentralized structures.

Issues that must be addressed

With a decentralized (and pseudonymous) project like this, many issues would have to be addressed:

How would people in this network be held accountable?

How would collusion between parties (arbitrators and traders) be mitigated/eliminated?

What is to disincentivize a malicious trader/arbitrator from creating multiple aliases?

How will consumer protection be handled?

Consumer Protection

Several steps have been taken to mitigate potential harm to users of this exchange. After all, if consumers are likely to be harmed in a decentralized system, then many newcomers would be turned off by the idea of such a system.

The possibility of creating several pseudonymous identities is drastically limited by the fact that one must have a bank account associated with an account on the network. It alone would not be perfect, as one person can own multiple bank accounts; however the number of Bitsquare accounts that can be created by one person is very limited.

On top of this there are contracts that are digitally signed between the traders with every transaction.

The contracts would include relevant details about each trader, as well as bank account details for the trader receiving (or sending) fiat. They supposedly could easily be used by both arbitrators and lawyers outside of the exchange. However, for many people, lawers are likely to not be an option, for legal or financial reasons. Regardless, providing this option is a nice touch.

Collateral can also be used as a means of disincentivizing the misconduct of a buyer/seller. During each transaction, a certain percentage of the trade volume will be set aside in a separate 2-of-3 bitcoin address. If the trade is successful, then this collateral will be returned to the participants of the trade. It’s worth noting that collateral must be in terms of BTC, so all participants in the network must have a small amount of BTC from the start. It’s not clear if this will affect adoption, as this attribute doesn’t make entry very easy for newcomers to cryptocurrencies in general. However it’s possible that Bitsquare is mainly targeted towards those who value decentralization highly; they are likely to have BTC to begin with.

Due to the fact that traditional bank accounts are involved in transactions, unjustified chargebacks must be taken into account. As we know, bitcoin does not have any built in chargeback mechanism, however traditional bank transactions do. Because this is the case, a person can claim to want to purchase BTC, wait to receive said BTC, send the fiat money to the seller, only to then submit a chargeback. Since the victim in this scenario would likely go to an arbitrator to settle this dispute, arbitrators will have the exclusive ability to create and edit fraud reports. These reports will be network-wide so that anyone can see them and any arbitrator can edit them.

The main form of protection, will be in the form of arbitration. A person on the exchange can act as an arbitrator to help resolve disputes. They will be responsible for contacting both parties in the case of a dispute and will decide who wins in said disputes. Arbitrators are paid via a fee they set themselves combined with a piece of the collateral provided by both parties.

To disincentivize the creation of multiple arbitration identities, however, one must pay bitcoins to create an arbitration account. The amount that’s paid is based upon the maximum trade volume (in terms of BTC) they will be willing to settle disputes for. So, for example, if I specified that I would not resolve disputes involving more than 0.5 BTC, then I would most likely pay either 2.5 BTC or 5 BTC to create my account (5x or 10x the specified amount of 0.5 BTC).There are various theoretical means of misconduct in this “risk analysis” document, which is still being revised and updated. It mainly covers fraud concerning arbitrators, however for a review of a dispute would be resolved between traders, you can look at this section of their whitepaper.

More on Arbitrators

Arbitrators are an essential part of the Bitsquared exchange, as stated earlier. For anyone interested in becoming an arbitrator, you can register either with a pseudonym or your real name with ID verification. ID verification can come in several forms, such as a passport, driver’s license, any other government-issued ID, PGP key, or social-media account link.

There will be a standardized form for all prospective arbitrators to fill out. This will cover your name (or pseudonym), the highest trade volume you will resolve disputes for, your own arbitration fee, supported languages, and so on. As stated earlier, arbitrators would have to pay a sort of collateral in terms of BTC to register; this will likely be a multiple of the trade volume you specified.

Reputation will also play a large role in being selected as an arbitrator. Arbitrators will start with a reputation of 1, and this will change based on feedback from traders. If an arbitrator loses reputation, presumably from acting out of line, part of their collateral will be taken. Those will lower reputations will also have less exposure across the network. Inversely, if an arbitrator’s reputation increases, they will be more likely to increase their exposure and their collateral is unaffected.

An arbitrator’s profile will also be crucial. Since people have the option of using an authentic ID to register, it’s plausible that traders will filter out those without proper ID verification. Since traders have the ability to filter through arbitrators, proper ID verification is definitely something to consider when becoming an arbitrator.

There were more technical nuances to the arbitration system that were not discussed here. If you’re interested, you can look at this document about the arbitration system. Though keep in mind, it is still being revised and updated like the other two documents that were linked.

More on Fees

Fees will be used as a means of incentivizing and disincentivizing behavior, as shown in certain cases previously. To be more specific, however, the fees will likely be set for actions such as: becoming a trader on the network, creating a buy/sell offer, using an arbitrator, becoming an arbitrator, and transacting in bitcoin (the standard network transaction fee).

Most likely, many bitcoin fees will not require any confirmations. The whitepaper states that it may be possible to double spend in theory, but will be exceptionally unlikely and difficult to execute. If a double spend technique were developed, it’s likely that harsh penalties of some sort will be implemented when they are detected.

Conclusion

Bitsquare is a very nuanced and complex means of solving the issue of trust in an exchange. However, it does appear to be very well thought out and is being worked on steadily. It’s done by a team of 6 developers who hope to have a public alpha released in about 2 months. Ideally, they plan to release a live version of Bitsquare in roughly 6 months. In the meantime, they aim to build a community around Bitsquare so that there is a userbase upon release. After all, why would people want to use Bitsquare if nobody else is using it? Concerning funding, there is a bit of uncertainty. They do have a bitcoin address that you can donate to on their main site. However, they’re confident that even without a form of crowdfunding or similar, they will be able to release a working version of Bitsquare.